Financially

Bam! Bam! Bam! Huge Financial Bombs Just Got Dropped All Over Europe

The European debt crisis has just gone to an entirely new level.  Just when it seemed like things may be stabilizing somewhat, we get news of huge financial bombs being dropped all over Europe.  Very shortly after U.S. financial markets closed on Friday, S&P announced credit downgrades for nine European nations.  This included both France and Austria losing their cherished AAA credit ratings.  When the credit rating of a country gets slashed, that is a signal to investors that they should start demanding higher interest rates when they invest in the debt of that nation.  Over the past year it has become significantly more expensive for many European nations to borrow money, and these new credit downgrades certainly are certainly not going to help matters.  Quite a few financially troubled nations in Europe are very dependent on the ability to borrow huge piles of cheap money, and as debt becomes more expensive that is going to push many of them over the edge.    Yesterday I wrote about 22 signs that we are on the verge of a devastating global recession, and unfortunately that list just got a whole lot longer.

Over the past several months we have seen quite a few credit downgrades all over Europe, but we have never seen anything quite like what S&P just did.  Standard & Poor’s unleashed a barrage of credit downgrades on Friday….

-France was downgraded from AAA to AA+

-Austria was downgraded from AAA to AA+

-Italy was downgraded two more levels from A to BBB+

-Spain was downgraded two more levels

-Portugal was downgraded two more levels

-Cyprus was downgraded two more levels

-Malta was downgraded one level

-Slovakia was downgraded one level

-Slovenia was downgraded one level

This is really bad news for anyone that was hoping that things in Europe would start to get better.  Borrowing costs for many of these financially troubled nations are going to go even higher.

In addition, there was another really, really troubling piece of news that came out of Europe on Friday.

It was announced that negotiations between the Greek government and private holders of Greek debt have broken down.

The Institute of International Finance has been representing private bondholders in negotiations with the Greek government about the terms of a “voluntary haircut” that is supposed to be a key component of the “rescue plan” for Greece.

Greece desperately needs private bondholders to agree to accept a “voluntary haircut” of 50% or more.  Without some sort of an agreement, the finances of the Greek government will collapse very quickly.

For now, negotiations have failed.  There is hope that negotiations will resume soon, but Greece is rapidly running out of time.

The Institute of International Finance issued a statement on Friday which said the following….

“Unfortunately, despite the efforts of Greece’s leadership, the proposal put forward … which involves an unprecedented 50% nominal reduction of Greece’s sovereign bonds in private investors’ hands and up to €100 billion of debt forgiveness — has not produced a constructive consolidated response by all parties, consistent with a voluntary exchange of Greek sovereign debt”

The IIF says that negotiations are “paused for reflection” right now, but they are hoping that they will be able to resume before too long….

“Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach”

Something needs to be done, because Greece is experiencing a complete and total financial meltdown.

Back at the end of July, the yield on one year Greek bonds was sitting at about 40 percent.  Today, the yield on one year Greek bonds is up to an astounding 396 percent.

That is how fast these things can move when confidence disappears.

Those living in the United States should keep that in mind.

Unfortunately, Greece is not the only European nation that is completely falling apart financially.

We aren’t hearing much about it in the U.S. media, but Hungary is a total basket case right now.  The credit rating of Hungary was reduced to junk status some time ago, and now the IMF and the EU are threatening to withhold financial aid from Hungary if the Hungarians do not run their country exactly as they are being told to do.

In particular, the IMF and the EU are absolutely furious that Hungary is trying to take more political control over the central bank in Hungary.  The following is from an article in the Daily Mail….

The European Union has stepped up pressure on Hungary over the country’s refusal to implement austerity policies and threatened legal action over its new constitution.

The warnings escalated the standoff between Budapest and the EU, as Hungary negotiates fresh financial aid from Europe and the International Monetary Fund.

Over the past months, the country’s credit rating has been cut to junk by all three major rating agencies, unemployment is 10.6 percent and the country may be facing a recession.

But bailout negotiations broke down after Budapest refused to cut public spending and implemented a new constitution reasserting political control over its central bank.

Slovenia is a total mess right now as well.  The following comes from a recent article posted on EUObserver.com….

Slovenia’s borrowing costs have reached ‘bail-out territory’ after lawmakers rejected the premier-designate, putting the euro-country on the line for further downgrades by ratings agencies.

Zoran Jankovic, the mayor of Slovenia’s capital Ljubljana, fell four votes short of the 46 needed to be approved as prime minister by the parliament, with the country’s president set to re-cast his name or propose someone new within two weeks.

Some time ago, I warned that 2012 was going to be a more difficult year for the global economy than 2011 was.

Well, things are certainly starting to shape up that way.

Europe is heading for some really hard times.  What is about to happen in Europe is going to shake the entire global financial system.

Those that live in the United States should take notice, because the U.S. financial system is far more fragile than most people believe.

Our banking system is a gigantic mountain of debt, leverage and risk and it could fall again at any time.

In addition, the U.S. debt problem is bigger than it has ever been before.

For example, did you know that the federal government is on a pace to borrow 6.2 trillion dollars by the end of Obama’s first term in office?

That is more debt than the U.S. government accumulated from the time that George Washington became president to the time that George W. Bush became president.

For now the U.S. government is still able to borrow giant piles of super cheap money, but such a situation does not last forever.

Just ask Greece.

Already there are indications that foreigners are starting to dump large amounts of U.S. debt.  If this trickle becomes a flood things could become very bad for the United States very quickly.

We are on the verge of some very bad things.  The kinds of “financial bombs” that we saw dropped today are going to become much more frequent.  As governments, banks and investors scramble to survive, we are going to see extreme amounts of volatility in the financial marketplace.

Things are not going to be “normal” again for a really, really long time.

Hold on tight, because 2012 is going to be a very interesting year.

20 Signs That The Culture Of Government Dependence Has Gotten Completely And Totally Out Of Control

More Americans are financially dependent on the government than ever before.  For a variety of reasons, there are now tens of millions of Americans that would not be able to survive without government assistance.  As I wrote about the other day, the insane economic policies of our “representatives” in Washington D.C. have created a situation where there are not nearly enough decent jobs for everyone.  So the job market has become a giant game of “musical chairs” and a lot of American families have been left out in the cold when the music has stopped.  Of course we are not going to let them starve in the streets.  There are also some Americans that simply do not have the capacity to take care of themselves.  It is certainly the compassionate thing to do to give them a helping hand.  However, with all of that said, we also have to face the fact that we have created a “culture of dependence” in this country.  Americans that are now in their prime working years have been taught all of their lives that the government is going to take care of them from the cradle to the grave.  This culture of government dependence has gotten completely and totally out of control, and now nearly half of all American households receive some form of government benefits.  As a result, our debt is absolutely exploding, everyone looks to the government to solve our problems and very few Americans seem to possess a very strong work ethic any longer.

This article is going to make a lot of people angry, but it is imperative that we all comes to grips with the fact that this is not how a society is supposed to work.  Yes, we should help those that do not have the capacity to help themselves.  Yes, the insane policies of the federal government have created this economic environment where very few people can find jobs.  We didn’t want to keep their jobs in the country, so now we are going to have to support millions of displaced American workers somehow.

However, the notion that the federal government is supposed to take care of us from the time that we are born until the time that we die is poisonous.  As you will see below, federal government handouts have absolutely skyrocketed in recent years, but this has just created an environment where people are demanding even more handouts.

The truth is that the government is not your mommy and your daddy.  The government is not there to take money away from someone else and give it to you.  The government is supposed to be the “referee” – not your own personal caretaker.

So should we just start dumping millions upon millions of people off of government welfare rolls?

Of course not.  We cannot do that, because from the time that they were babies millions of Americans have been taught to be completely dependent on the government.  If we just suddenly cut them off they would not be able to make it.  They simply have never learned how.  We aren’t going to let tens of millions of people starve in the streets.  A growing percentage of Americans have never learned how to make it on their own.

That is one of the reasons why this culture of government dependence is so toxic.  People never learn to take care of themselves.

Unfortunately, the American people have become absolutely addicted to government money.  One way not to get elected is to threaten to reduce the government checks that people get every month.  Any politician that is honest about what we really can afford usually does not get a whole lot of support.

Yes, there is nothing wrong with helping the poor, the needy, the homeless and the despairing.

But each year millions more Americans climb aboard the “safety net”.  As I keep warning, at some point the “safety net” is going to break.

The government is not supposed to be your God.  If you have problems, then you need to fix them.

Yes, without a doubt that is not an easy thing to do in this economic environment.  Our government has royally messed things up.

But life is not easy and life is not fair.  Sometimes you just have to do the best you can with what you have.  If you wait around for the government to be your savior, you will almost always end up deeply disappointed and you will never get anywhere in life.

The following are 20 signs that the culture of government dependence has gotten completely and totally out of control….

#1 If you can believe it, 48.5% of all Americans now live in a household that receives some form of government benefits.  Back in 1983, that number was less than 30 percent.

#2 Way too many Americans believe that the government should just swoop in and solve all of their problems.  For example, the plight of a single mother named Angel Adams made national headlines recently.  Over the years her relationships with three different men have produced 15 children, and she was recently found living in a single motel room with 12 of those children.

As you can see in the video below, Adams is looking for the government to come in and rescue her.  The following is what Adams told one reporter….

“Somebody needs to pay for all my children and my – for all my suffering. Somebody needs to be held accountable, and they need to pay.”

You can see news clips about this case in the video posted below….

After seeing this video, most Americans would respond with statements such as these….

*”The government needs to help that mother out”

*”The government needs to take those children away from her”

*”The government needs to keep women like that from having so many kids”

Do you see the common theme there?

Today, Americans almost always think that the solution to a problem involves the government doing something.

In America, women should be free to have as many children as they want.  But they should also not expect the government to swoop in and rescue them from the consequences of the choices that they have made.

Yes, we always need to make sure that all children have food to eat and a roof over their heads.  But it is not the job of the government to come in and control her life, and it is not the job of the government “to pay” for her to have a comfortable life either.

#3 The amount of money paid out to individual citizens by the government today is absolutely staggering.  In 1980, government transfer payments accounted for just 11.7% of all income.  Today, government transfer payments account for 18.4% of all income.

#4 According to a recent ABC News report, suicides in rural America are spiking, and experts say that cuts to Medicaid are partly to blame….

Kathie Garrett, co-chairman of the Idaho Council on Suicide Prevention, says the problem has gotten only worse since the recession. “The poor economy and unemployment—those put a lot of stress on people’s lives,” she explains. To save money, people skip doctor visits and cut back on taking prescribed medications. Cuts in Medicaid have reduced the services available to the mentally ill.

“I personally know people who lost Medicaid who’ve attempted suicide,” says Garrett.

#5 By the end of 2011, approximately 55 million Americans will receive a total of 727 billion dollars in Social Security benefits.  In future years, this dollar figure is projected to absolutely skyrocket.

#6 When you total it all up, American households are now receiving more money from the U.S. government than they are paying to the government in taxes.

#7 It is being projected that the federal government will account for more than 50 percent of all health care spending in 2012.

#8 Back in 1965, only one out of every 50 Americans was on Medicaid.  Today, one out of every 6 Americans is on Medicaid.

#9 According to the Congressional Budget Office, the Social Security system paid out more in benefits than it received in payroll taxes in 2010.  That was not supposed to happen until at least 2016.

#10 The federal government is expected to “take care” of their workers far better than the private sector does.  If you can believe it, the average federal employee in the Washington D.C. area brings in total compensation worth more than $126,000 a year.

#11 Last year, federal employees “earned” approximately 447 billion dollars in total compensation.

#12 Spending by the federal government accounts for approximately one third of the GDP of the entire Washington D.C. region.

#13 The federal government spent more than 50 billion dollars on “housing assistance” in 2009.

#14 The U.S. government now says that the Medicare trust fund will run out five years faster than they were projecting just last year.

#15 The total cost of just three federal government programs – the Department of Defense, Social Security and Medicare – exceeded the total amount of taxes brought in during fiscal 2010 by 10 billion dollars.

#16 Right now, there are more than 45 million Americans on food stamps.  That means that approximately one out of every seven Americans is dependent on the federal government for food.

#17 The number of Americans on food stamps has increased 74% since 2007.

#18 Sadly, one out of every four American children is now on food stamps.

#19 In 2010, 42 percent of all single mothers in the United States were on food stamps.

#20 According to one study, “64.3 million Americans depended on the government (read: their fellow citizens) for their daily housing, food, and health care” during 2009.

After reading this article, a lot of people may get the impression that I am greedy and that I am “on the side” of the rich.

That is not the case at all.

I have repeatedly written about the growing problem of income inequality in America.

I have repeatedly written about the need to reduce the power and the wealth of the big banks and the big corporations.

I have repeatedly written about how our government is run by wealthy people and almost all political campaigns are funded by wealthy people.

We need to level the playing field so that individuals and small businesses have a chance to thrive once again.

Unfortunately, a lot of people out there think that the solution to these problems is to raise taxes on the wealthy and redistribute even more money to those receiving handouts.

Number one, that will never get those on handouts on the road to a better life.  Handouts are never a permanent solution.  A good job is a permanent solution.

Number two, that will only make the culture of government dependence even worse.

Yes, we need to take care of the poor and the needy.

I am a huge advocate of that.

In the book of James, it says the following….

Now listen, you rich people, weep and wail because of the misery that is coming on you. Your wealth has rotted, and moths have eaten your clothes. Your gold and silver are corroded. Their corrosion will testify against you and eat your flesh like fire. You have hoarded wealth in the last days.

It is not the job of the government to take care of the poor and the needy.

It is our job.

If you are able to take care of yourself and your family, and you are not actively doing something to help the poor, then something is wrong.

There is nothing wrong with making a lot of money.

But there is something wrong with hoarding your wealth.

Sadly, most Americans have grown accustomed to the idea that they don’t have to take care of the poor because “the government” is going to do it.

That is another example of the “culture of government dependence”.  We have gotten so used to “the government” taking care of others that we don’t even lift a finger ourselves.

We need to stop waiting for the government to fix everything.

The government is not going to fix our lives.

The government is not going to fix the lives of those around us either.

We need to start taking responsibility for our own lives and for our own communities.

Does anyone disagree?

***UPDATE***

Here is another example from ABC News of an American that completely lost it when she realized that the government was not going to be her savior….

A Texas woman who for months was unable to qualify for food stamps pulled a gun in a state welfare office and staged a seven-hour standoff with police that ended with her shooting her two children before killing herself, officials said Tuesday.

We need to help the American people understand that the government is always going to end up failing them and that they need to fix their own lives.

22 Reasons Why We Could See An Economic Collapse In Europe In 2012

Will 2012 be the year that we see an economic collapse in Europe?  Before you dismiss the title of this article as “alarmist”, read the facts listed in the rest of this article first.  Over the past several months, there has been an astonishing loss of confidence in the European financial system.  Right now, virtually nobody wants to loan money to financially troubled nations in the EU and virtually nobody wants to lend money to major European banks.  Remember, one of the primary reasons for the financial crisis of 2008 was a major credit crunch that happened here in the United States.  This burgeoning credit crunch in Europe is just one element of a “perfect storm” that is rapidly coming together as we get ready to go into 2012.  The signs of trouble are everywhere.  All over Europe, governments are implementing austerity measures and dramatically cutting back on spending.  European banks are substantially cutting back on lending as they seek to meet new capital requirements that are being imposed upon them.  Meanwhile, bond yields are going through the roof all over Europe as investors lose confidence and demand much higher returns for investing in European debt.  It has become clear that without a miracle happening, quite a few European nations and a significant number of European banks are not going to be able to get the funding that they need from the market in 2012.  The only thing that is going to avert a complete and total financial meltdown in Europe is dramatic action, but right now European leaders are so busy squabbling with each other that a bold plan seems out of the question.

The following are 22 reasons why we could see an economic collapse in Europe in 2012….

#1 Germany could rescue the rest of Europe, but that would take an unprecedented financial commitment, and the German people do not have the stomach for that.  It has been estimated that it would cost Germany 7 percent of GDP over several years in order to sufficiently bail out the other financially troubled EU nations.  Such an amount would far surpass the incredibly oppressive reparations that Germany was forced to pay out in the aftermath of World War I.

A host of recent surveys has shown that the German people are steadfastly against bailing out the rest of Europe.  For example, according to one recent poll 57 percent of the German people are against the creation of eurobonds.

At this point, German politicians are firmly opposed to any measure that would place an inordinate burden on German taxpayers, so unless this changes that means that Europe is not going to be saved from within.

#2 The United States could rescue Europe, but the Obama administration knows that it would be really tough to sell that to the American people during an election season.  The following is what White House Press Secretary Jay Carney said today about the potential for a bailout of Europe by the United States….

“This is something they need to solve and they have the capacity to solve, both financial capacity and political will”

Carney also said that the Obama administration does not plan to commit any “additional resources” to rescuing Europe….

“We do not in any way believe that additional resources are required from the United States and from American taxpayers.”

#3 Right now, banks all over Europe are in deleveraging mode as they attempt to meet new capital-adequacy requirements by next June.

According to renowned financial journalist Ambrose Evans-Pritchard, European banks need to reduce the amount of lending on their books by about 7 trillion dollars in order to get down to safe levels….

Europe’s banks face a $7 trillion lending contraction to bring their balance sheets in line with the US and Japan, threatening to trap the region in a credit crunch and chronic depression for a decade.

So what does that mean?

It means that European banks are going to be getting really, really stingy with loans.

That means that it is going to become really hard to buy a home or expand a business in Europe, and that means that the economy of Europe is going to slow down substantially.

#4 European banks are overloaded with “toxic assets” that they are desperate to get rid of.  Just like we saw with U.S. banks back in 2008, major European banks are busy trying to unload mountains of worthless assets that have a book value of trillions of euros, but virtually nobody wants to buy them.

#5 Government austerity programs are now being implemented all over Europe.  But government austerity programs can have very negative economic effects.  For example, we have already seen what government austerity has done to Greece. 100,000 businesses have closed and a third of the population is now living in poverty.

But now governments all over Europe have decided that austerity is the way to go.  The following comes from a recent article in the Economist….

France’s budget plans are close to being agreed on; further cuts are likely but will be delayed until after the elections in spring. Italy has yet to vote through a much-revised package of cuts. Spain’s incoming government has promised further spending cuts, especially in regional outlays, in order to meet deficit targets agreed with Brussels.

#6 The amount of debt owed by some of these European nations is so large that it is difficult to comprehend.  For example, Greece, Portugal, Ireland, Italy and Spain owe the rest of the world about 3 trillion euros combined.

So what will massive government austerity do to troubled nations such as Spain, Portugal, Ireland and Italy?  Ambrose Evans-Pritchard is very concerned about what even more joblessness will mean for many of those countries….

Even today, the jobless rate for youth is near 10pc in Japan. It is already 46pc in Spain, 43pc in Greece, 32pc in Ireland, and 27pc in Italy. We will discover over time what yet more debt deleveraging will do to these societies.

#7 Europe was able to bail out Greece and Ireland, but there is no way that Italy will be able to be rescued if they require a full-blown bailout.

Unfortunately, Italy is in the midst of a massive financial meltdown as you read this.  The yield on two year Italian bonds is now about double what it was for most of the summer.  There is no way that is sustainable.

It would be hard to overstate how much of a crisis Italy represents.  The following is how former hedge fund manager Bruce Krasting recently described the current situation….

At this point there is zero possibility that Italy can refinance any portion of its $300b of 2012 maturing debt. If there is anyone at the table who still thinks that Italy can pull off a miracle, they are wrong. I’m certain that the finance guys at the ECB and Italian CB understand this. I repeat, there is a zero chance for a market solution for Italy.

Krasting believes that either Italy gets a gigantic mountain of cash from somewhere or they will default within six months and that will mean the start of a global depression….

I think the Italian story is make or break. Either this gets fixed or Italy defaults in less than six months. The default option is not really an option that policy makers would consider. If Italy can’t make it, then there will be a very big crashing sound. It would end up taking out most of the global lenders, a fair number of countries would follow into Italy’s vortex. In my opinion a default by Italy is certain to bring a global depression; one that would take many years to crawl out of.

#8 An Italian default may be closer than most people think.  As the Telegraph recently reported, just to refinance existing debt, the Italian government must sell more than 30 billion euros worth of new bonds by the end of January….

Italy’s new government will have to sell more than EURO 30 billion of new bonds by the end of January to refinance its debts. Analysts say there is no guarantee that investors will buy all of those bonds, which could force Italy to default.

The Italian government yesterday said that in talks with German Chancellor Angela Merkel and French President Nicolas Sarkozy, Prime Minister Mario Monti had agreed that an Italian collapse “would inevitably be the end of the euro.”

#9 European nations other than just the “PIIGS” are getting into an increasing amount of trouble.  For example, S&P recently slashed the credit rating of Belgium to AA.

#10 Credit downgrades are coming fast and furious all over Europe now.  At this point it seems like we see a new downgrade almost every single week.  Some nations have been downgraded several times.  For instance, Fitch has downgraded the credit rating of Portugal again.  At this point it is being projected that Portuguese GDP will shrink by about 3 percent in 2012.

#11 The financial collapse of Hungary didn’t make many headlines in the United States, but it should have.  Moody’s has cut the credit rating of Hungarian debt to junk status, and Hungary has now submitted a formal request to the EU and the IMF for a bailout.

#12 Even faith in German debt seems to be wavering. Last week, Germany had “one of its worst bond auctions ever“.

#13 German banks are also starting to show signs of weakness.  The other day, Moody’s downgraded the ratings of 10 major German banks.

#14 As the Telegraph recently reported, the British government is now making plans based on the assumption that a collapse of the euro is only “just a matter of time”….

As the Italian government struggled to borrow and Spain considered seeking an international bail-out, British ministers privately warned that the break-up of the euro, once almost unthinkable, is now increasingly plausible.

Diplomats are preparing to help Britons abroad through a banking collapse and even riots arising from the debt crisis.

The Treasury confirmed earlier this month that contingency planning for a collapse is now under way.

A senior minister has now revealed the extent of the Government’s concern, saying that Britain is now planning on the basis that a euro collapse is now just a matter of time.

#15 The EFSF was supposed to help bring some stability to the situation, but the truth is that the EFSF is already a bad joke.  It has been reported that the EFSF has already been forced to buy up huge numbers of its own bonds.

#16 Unfortunately, it looks like a run on the banks has already begun in Europe.  The following comes from a recent article in The Economist….

“We are starting to witness signs that corporates are withdrawing deposits from banks in Spain, Italy, France and Belgium,” an analyst at Citi Group wrote in a recent report. “This is a worrying development.”

#17 Confidence in European banks has been absolutely shattered and virtually nobody wants to lend them money right now.

The following is a short excerpt from a recent CNBC article….

Money-market funds in the United States have quite dramatically slammed shut their lending windows to European banks. According to the Economist, Fitch estimates U.S. money market funds have withdrawn 42 percent of their money from European banks in general.

And for France that number is even higher — 69 percent. European money-market funds are also getting in on the act.

#18 There are dozens of major European banks that are in danger of failing.  The reality is that most major European banks are leveraged to the hilt and are massively exposed to sovereign debt.  Before it fell in 2008, Lehman Brothers was leveraged 31 to 1.  Today, major German banks are leveraged 32 to 1, and those banks are currently holding a massive amount of European sovereign debt.

#19 According to the New York Times, the economy of the EU is already projected to shrink slightly next year, and this doesn’t even take into account what is going to happen in the event of a total financial collapse.

#20 There are already signs that the European economy is seriously slowing down.  Industrial orders in the eurozone declined by 6.4 percent during September.  That was the largest decline that we have seen since the midst of the financial crisis in 2008.

#21 Panic and fear are everywhere in Europe right now.  The European Commission’s index of consumer confidence has declined for five months in a row.

#22 European leaders are really busy fighting with each other and a true consensus on how to solve the current problems seems way off at the moment.  The following is how the Express recently described rising tensions between German and British leaders….

The German Chancellor rejected outright Mr Cameron’s opposition to a new EU-wide financial tax that would have a devastating impact on the City of London.

And she refused to be persuaded by his call for the European Central Bank to support the euro. Money markets took a dip after their failure to agree.

Are you starting to get the picture?

The European financial system is in a massive amount of trouble, and when it melts down the entire globe is going to be shaken.

But it isn’t just me that is saying this.  As I mentioned in a previous article, there are huge numbers of respected economists all over the globe that are now saying that Europe is on the verge of collapse.

For example, just check out what Credit Suisse is saying about the situation in Europe….

“We seem to have entered the last days of the euro as we currently know it. That doesn’t make a break-up very likely, but it does mean some extraordinary things will almost certainly need to happen – probably by mid-January – to prevent the progressive closure of all the euro zone sovereign bond markets, potentially accompanied by escalating runs on even the strongest banks.”

Many European leaders are promoting much deeper integration and a “European superstate” as the answer to these problems, but it would take years to implement changes that drastic, and Europe does not have that kind of time.

If Europe experiences a massive economic collapse and a prolonged depression, it may seem like “the end of the world” to some people, but things will eventually stabilize.

A lot of people out there seem to think that the global economy is going to go from its present state to “Mad Max” in a matter of weeks.  Well, that is just not going to happen.  The coming troubles in Europe will just be another “wave” in the ongoing economic collapse of the western world.  There will be other “waves” after that.

Of course this current sovereign debt crisis could be entirely averted if the countries of the western world would just shut down their central banks and start issuing debt-free money.

The truth is that there is no reason why any sovereign nation on earth ever has to go a penny into debt to anyone.  If a nation is truly sovereign, then the government has the right to issue all of the debt-free money that it wants.  Yes, inflation would always be a potential danger in such a system (just as it is under central banking), but debt-free money would mean that government debt problems would be a thing of the past.

Unfortunately, most of the countries of the world operate under a system where more government debt is created when more currency is created.  The inevitable result of such a system is what we are witnessing now.  At this point, nearly the entire western world is drowning in debt.

There are alternatives to our current system.  But nobody in the mainstream media ever talks about them.

So instead of focusing on truly creative ways to deal with our current problems, we are all going to experience the bitter pain of the coming economic collapse instead.

Things did not have to turn out this way.

Is The End Of The Euro In Sight?

The future of the euro is hanging by a thread at the moment.  The massive debt problems of nations such as Greece, Italy and Portugal are dragging down the rest of the Europe, and the political will in northern Europe to continue to bail out these debt-ridden countries is rapidly failing.  Could the end of the euro actually be in sight?  The euro was really a very interesting experiment.  Never before had we seen a situation where monetary union was tried without political and fiscal union along with it on such a large scale.  The euro worked fairly well for a while as long as everyone was paying their debts.  But now Greece has collapsed financially, and several other countries in the eurozone (including Italy) are on the way.  Right now the only thing holding back a complete financial disaster in Europe are the massive bailouts that the wealthier nations such as Germany have been financing.  But now a wave of anti-bailout sentiment is sweeping Germany and the future of any European bailouts is in doubt.  So what does that mean for the euro?  It appears that there are two choices.  Either we will see much deeper fiscal and political integration in Europe (which does not seem likely at this point), or we will see the end of the euro.

That status quo cannot last much longer.  The citizens of wealthy nations such as Germany are becoming very resentful that gigantic piles of their money are being poured into financial black holes such as Greece.  In fact, it is rapidly getting to the point where we could actually see rioting in the streets of German cities over all of this.

All of this instability is creating a tremendous amount of fear in world financial markets.  Nobody is sure if Greece is going to default or not.

Without more bailout money, Greece will most certainly default.  If anyone does not think that one domino cannot set off a massive chain reaction, just remember what happened back in 2008.

Bear Stearns and Lehman Brothers set off a chain reaction that was felt in every corner of the globe.  All of a sudden credit markets froze up because nobody was sure who had significant exposure to bad mortgages.

Today, the entire world financial system runs on debt, so when there is a credit crunch it can have absolutely devastating economic consequences.  The financial crisis of 2008 helped plunge the world into the greatest recession that the globe had seen since the 1930s.

In the old days, nations such as Greece that got into too much debt would just fire up the printing presses and cover over their problems with devalued currency.

Well, those nations that are using the euro simply cannot do that.  The government of Greece cannot simply zap a whole bunch of euros into existence in order to solve their problems.

Right now, major European banks are holding massive amounts of debt from various European governments on their balance sheets.  Most of these European banks are also very highly leveraged.  Even a moderate drop in the value of those debt holdings could wipe out a number of these banks.

The head of the IMF, Christine Lagarde, recently told Der Spiegel the following….

“There has been a clear crisis of confidence that has seriously aggravated the situation. Measures need to be taken to ensure that this vicious circle is broken”

Unfortunately, what Lagarde said was right.  You see, the financial system in Europe is a “confidence game” and a “crisis of confidence” is all that it would take to bring it down because it does not have a solid foundation.

Just like the U.S. financial system, the financial system in Europe is a mountain of debt, leverage and risk.  If the winds start blowing the wrong direction, the entire thing could very easily come tumbling down.

Over the past couple of weeks, the outlook in Europe has become decidedly negative.  For example, one senior IMF economist is now actually projecting that Greece will experience a “hard default” at some point in the coming months….

I expect a hard default definitely before March, maybe this year

If Greece defaults, that would mean that the bailouts have failed.  That would also mean that several other nations in Europe would be in danger of defaulting soon as well.

The consequences of a wave of defaults in Europe would be absolutely staggering.  As mentioned above, major banks in Europe are deeply exposed to sovereign debt.

Regarding this issue, Deutsche Bank Chief Executive Josef Ackermann recently made the following stunning admission….

“It’s stating the obvious that many European banks would not survive having to revalue sovereign debt held on the banking book at market levels.”

Yes, you read that correctly.

There are quite a few major European banks that are in imminent danger of collapse.

Even though there hasn’t been any sovereign defaults yet, we are already starting to see massive financial devastation in Europe.  Just check out some of the financial carnage from Monday….

*The stock market in Germany was down more than 5%.

*The stock markets in France and Italy were down more than 4%.

*Royal Bank of Scotland was down more than 12%.

*Deutsche Bank was down more than 6%.

*Societe Generale was down more than 8%.

*Italy’s UniCredit was down more than 7%.

*Barclays was down more than 6%

*Credit Suisse was down more than 4%.

*The yield on 2 year Greek bonds was up to 50.38%.

*The yield on 1 year Greek bonds was up to 82.14%.  A year ago it was under 10%.

Just like in 2008, banking stocks are leading the decline.  We have another major financial crisis on our hands and there is no solution in sight.

As the financial world becomes increasingly unstable, investors are flocking to gold.  In case you have not noticed, gold is up over $1900 an ounce again.

So what comes next?

Well, on Wednesday Germany’s constitutional court is scheduled to announce its verdict on the legality of the latest bailout package for Greece.  The court is expected to rule that the bailout package is legal, but if they don’t that would be really bad news for the euro.

However, whatever the court rules, the reality is that the turbulent political atmosphere inside Germany is probably a much bigger issue as far as the future of the euro is concerned.

Right now, Germans are overwhelmingly opposed to more bailouts.  German Chancellor Angela Merkel’s political party just suffered a resounding defeat in local elections in Germany, and many within her own coalition are withdrawing support for any more bailouts.

This is going to make it very difficult to save the euro.  At this point, Germans have very little faith in the currency.

Just check out what Bob Chapman of the International Forecaster recently wrote about the current atmosphere in Germany….

76% of Germans say they have little or no faith in the euro, up from 71% two months ago. This is what we have been stating for ten years. Long-term 69% to 71% have never wanted the euro. The poll is not at all surprising. The Germany people are saying we have put up with the euro and euro zone for long enough – we want out now.

Germans are also very much against even deeper European economic integration.  For example, recent polling found that German voters are against the introduction of “Eurobonds” by about a 5 to 1 margin.

But Germans are not the only ones that are tired of the euro.  The countries of southern Europe have come to view the euro as a “straightjacket” that keeps them from having the financial flexibility that they need to deal with their debts.

Many people living in southern Europe consider the euro to be a financial instrument that allows nations such as Germany to have way too much power over them.  Just check out what Professor Giacomo Vaciago of Milan’s Catholic University recently had to say….

“It’s clear that the euro has virtually failed over the last ten years, even if you are not supposed to say that. We pretended to be Germans, but it was an illusion”

But if the bailouts fall apart and the euro collapses, we are going to see nations such as Greece fall into total financial collapse.

Just how desperate have things become in Greece?  Just consider the following excerpt from a recent article by Puru Saxena….

In Greece, government debt now represents almost 160% of GDP and the average yield on Greek debt is around 15%. Thus, if Greece’s debt is rolled over without restructuring, its interest costs alone will amount to approximately 24% of GDP. In other words, if debt pardoning does not occur, nearly a quarter of Greece’s economic output will be gobbled up by interest repayments!

Without help, there is no way that Greece is going to be able to avoid a default.

Sadly, Greece is far from the only major financial problem in Europe.  Portugal, Ireland and Italy also have debt to GDP ratios that are well above 100%.

As mentioned earlier, this is a massive problem for the financial system of Europe, because nearly all of the major European banks are leveraged to the hilt and they are massively exposed to government debt.

If you don’t think that this is a problem, just remember what happened back in 2008.

Back then, Lehman Brothers was leveraged 31 to 1.  When things turned bad, Lehman was wiped out very rapidly.

Today, major German banks are leveraged 32 to 1, and those banks are currently holding a massive amount of European sovereign debt.

Overall, the entire global banking system has a total of 2 trillion dollars of exposure to Greek, Irish, Portuguese, Spanish and Italian debt.

If European countries start defaulting, the dominoes are going to start falling and things will get really messy really quickly.

There are two things that could keep defaults from happening.

Number one, Germany and the other wealthy nations in the eurozone could just suck it up and decide to pour endless bailouts into nations such as Greece and Italy.

Number two, the nations of the eurozone could opt for much deeper economic and political integration.  That would mean a massive loss of sovereignty, but it would save the euro, at least for a little while.

Right now, the political will for either of those two choices is simply not there.  That does not mean that the political elite of Europe will not try to ram through some sort of a plan, but the reality is that Germans are already so upset about what has been going on that they are about ready to riot in the streets.

Yes, the end of the euro is a real possibility.

If the euro does collapse, it would likely cause a financial panic that would make 2008 look like a Sunday picnic.

So what do all of you think about the future of the euro?  Please feel free to leave a comment with your thoughts below….

 

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