Monday, May 10, 2010

Does a 750 Billion Bailout Matter

The Eurozone has finally admitted how big the financial problem is: 750 billion euros. This is a bailout fund, built with the support of the IMF and a commitment from the ECB to move into quantitative easing, buying sovereign euro denominated debt. So, basically, Europe just got bailed out by the IMF. And I thought the IMF was for emerging market countries...

While this historical move should calm markets in the short term, the longer term issue of insolvency has not been resolved. The financing terms that Greece needs to be on the path to solvency, even with draconian austerity, would be something like 3% average interest rates. And that's for years - mabe a decade or more - and assumes Greece will stick to the plan and will be able to start growing again.

Lurking in the background of this obfuscating bailout is the cold hard math: Greece and maybe 2-3 other Eurozone countries probably will need to default and restructure their sovereign loans, thus ending or at least dramatically changing the Euro experiment. The German Chancellor's party has just lost a majority in the most populous German state. So the anchor tenant in the EZ is a bit like Saks in a failing suburban mall: time top pull out.

That process is still ahead of us, but it is hard to tell when the moment will come that the market sees this inevitable day of reconing; 750 billion should tide things over for the next few quarters until the details of austerity and growth reveal the mirage. So this leaves us with the US, the UK and now the EZ pursuing quantitative easing, printing money to buy up sovereign debt. That's why gold is at $1200 and likely on its way higher over the next 2-3 years. The fiat currency system is in a competitive devaluation game that wont likely end well.

If you look at the total sovereign gold ownership, and overlay resource ownership, it may give you an idea of how to reorder the economic world. Lets start with gold reserves: US (8b tons), Germany (3.5b), IMF (3b), Italy (2.5), France (2.5), China (1b), Switzerland (1b), Japan (.7b), Netherlands (.6b), Russia (.6b). Add in Brazil, Canada and Australia for their resources. Not really sure how to order it all, but clearly the UK is nowhere to be found, Japand and Chian are bouyed by their US sovereign holdings, etc, etc. Maybe a worhtless study, but when we start getting concerned about sovereign solvency what else can we look at?


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