Greece Bailout Plan: The Real Story

by: Brett Owens

Here's my understanding of the Greece bailout plan that was passed yesterday. It's nearly $1 trillion. It should stabilize Greece for now - credit default swaps on Greek debt tumbled on the news - though from Greece's perspective, it's hard to see how this is anything more than "kicking the can down the road", as they are unlikely to ever be able to make good on this debt anyway.

The spin job is that the money is coming from the EU - but it's really coming from a new nebulous EU entity that is backed by the IMF - which is backed mostly by the US - and as an astute reader, you know that we are broke.

Now there's little doubt that most of this $1 trillion will need to be printed up for the occasion - and by following the daisy chain, it looks like Uncle Sam will be doing most of the printing. For the record, the euro was up yesterday, and the dollar was down (though we thought the euro was due to rally anyway).

So this is all massively inflationary, while at the same time bearish for the US dollar, right?

On the surface it is, but I'm not totally sold on that yet. One of the questions here is the bond markets - will the bond vigilantes allow this money to be printed, or will they drive up rates and force the issue?

Also as we've previous discussed, credit destruction is the real lynch pin here. If credit is destroyed (goes unpaid) faster than money is printed, that's deflationary, because we live in a credit based system (here's an explanation of why credit destruction is deflationary).

We'll be keeping an eye on credit spreads and gold to see how the each market reacts - this should be a very interesting week. Yesterday's stock market rally is not too noteworthy I believe, as we were so oversold that we were due for a bounce back. The extent of this rally should be instructive though - either we take out the previous highs and the markets march on, or we fail to do that, establish a lower high, and likely a downtrend in the markets.

Disclosure: No positions