You know, when you have a hole in your gas tank, you must fix the hole before putting any more gasoline in the tank.
Yes, it’s true that the engine stalls, and everything stops moving forward when you do that. But, you cannot keep dumping fuel into a leaky gas tank. Pretty soon, the price of gasoline will go up, and you’ll eventually run out of more of it to put in the tank.
Here are the steps for fixing a leaking gas tank:
- Stop car.
- Fix tank.
- Fill tank.
- Start car.
What Europe has done so far is fix the windshield wipers and change the oil. They haven’t done much for the leak except add more fuel. And, with the rise in yields on Monday, bond holders (gas stations) are unimpressed and asking for more money before agreeing to buy European debt. This is really bad news, and it doesn’t look like there’s going to be a quick turnaround on this one.
Why is it bad news?
Well, for one thing, this rise in interest rates will cause a massive increase in budget deficits throughout the EU. Interest rate payments are already a significant percentage of government spending, and an increase in those payments is only going to make things worse – much, much worse. AND, this increase in interest rates will directly impact business lending and how much it will cost.
There goes the future for economic growth in Europe.
Of course, there’s another problem. The economic power houses of Europe are upset about the idea of dumping good money after bad. They want to fix the problem, but they know that fixing the problem could kill everything, permanently.
And yes, they really are worried about that.
AND, they are worried that if the EU dies, we could be in for yet another round of war in Europe – which history shows to be inevitable if Europe falls apart (‘cuz Europe has always been at war).
And, before you ask, yes, they really are worried about that, too.
But, Europeans are like anybody else. They don’t like paying for idiot cousins, and when push comes to shove… all politics is local. And, when the locals get tired of paying, they’ll go get new politicians.
So, how long do you think European politicians are going to continue handing big payouts to Greece, Portugal, Spain, etc.?
Not very long, and there goes the EU.
And, depending on how much America has invested in the EU (think much, much), there goes America.
But, don’t just listen to me…
Do you hear that sound? It is the sound of Europe being hit with a cold dose of financial reality. The air has been let out of the balloon, and investors all over the world are realizing that absolutely nothing has been solved in Europe. The solutions being proposed by the politicians in Europe are just going to make things worse. You don’t solve a sovereign debt crisis by shredding confidence in sovereign debt. But that is exactly what the “voluntary 50% haircut” has done. You don’t solve a sovereign debt crisis by pumping up your “bailout fund” with borrowed money from China, Russia and Brazil. More debt is just going to make things even worse down the road. You don’t solve a sovereign debt crisis by causing a massive credit crunch. By giving European banks only until June 2012 to dramatically improve their credit ratios, it is going to force many of them to seriously cut back on lending. A massive credit crunch would significantly slow down economic activity in Europe and that is about the last thing that the Europeans need right now. If the deal that was reached last week was the “best shot” that Europe has got, then we are all in for a world of hurt.
On Monday, investors all over the globe began to understand the situation that we are now facing. The Dow was down 276 points, and the euphoria of late last week had almost entirely dissipated.
But much more important is what is happening to European bonds.
Investors are reacting very negatively to the European debt deal by demanding higher returns on bonds.
The yield on 10 year Italian bonds is up over 6 percent, and the 6 percent mark is a key psychological barrier. If it stays above this mark or goes even higher, that is going to mean big trouble for Italy.
The Italian government just can’t afford for debt to be this expensive. The higher the yield on 10 year bonds goes, the worse things are going to be for Italy financially.
Read the full article, here.
I keep trying to figure out how people can be so stupid. Is it something in the water?