Bloomberg came out with a very interesting article on Germany being fed up with having to bail out everyone but the Pope.
It seems that German Chancellor Angela Merkel, who was not happy with the bailout of Greece and then very upset about the $1 trillion aid fund, now seems to be saying "enough is enough" as many leaders in the European Union now want to increase the fund even more. It's refreshing to see someone like Merkel finally stand up and say no to rewarding failure by punishing success, but as we know Germany did not follow George Washington's wise advice when the country joined the European Union. Old wise George is famous for saying "beware of entangling alliances." That statement kept the U.S. out of major foreign wars for almost 120 years. But unfortunately Germany is now stuck and though they are the strongest economy by far, they will eventually have to bite the bullet and give in. The reason? Because everyone owes them so much money. It's that simple.
If they let Europe go down the tubes, then they might as well write everything they loaned off. They will kick and scream but in the end they will bail out everyone, because in a Ponzi scheme everything works great as long as the next sucker is willing to pay the interest payment to the previous sucker and only stops working when there are no more suckers left. The governments of the world have a hell of a ponzi scheme going and if one refuses to keep funding it, then everyone suddenly figures out that the bonds and notes they are holding are worthless and panic will start. Someday we will all wake up one morning and find out that we just experienced a Ponzi scheme that makes Madoff look like a kid selling lemonade for 5 cents a cup.
Because governments have the power to print money, they can monetize debts and if they print enough, monetize everyone's debt. Eventually the interest on all this debt the world has on its books will equal the tax revenue that will be coming in, and when that happens governments will have to file for bankruptcy or print enough money to pay all those debts off. This will cause an over supply of currency, and when there is over supply and no demand you get hyper inflation. I was in Greece last month and gas is selling for $9.25 a gallon there. And that is in a period of low inflation.
There is no simple answer here except to let nature take its course and let those who managed their affairs poorly fail, for if no one is allowed to fail then everyone fails. I know that sounds harsh, but if I run a business and spend more than I make then the eventual conclusion will be that I will not be able to pay my bills and will have to close down my business. Unfortunately if you are a government this is not the case.
As an investor one always has to have this ultimate negative catalyst in the back of the mind and know that this mess will inevitably hit the fan, but we are still some time away from that happening. Thus the smart move to make is to take a hit and run Guerrilla warfare approach to investing and invest heavily in cash when negative catalysts are everywhere and go into large multinationals when we have temporary reprieves like the extension of the Bush tax cuts or the EU's Trichet putting up a "free money, no one denied" sign on his door. These are windows that run for 3-5 months until negative catalysts start to show up again, and as they do you return more and more to cash. This strategy has saved me since 2008 and should continue to work well in the future as we are in an economic warzone and guerilla warfare. "Hit and run" is the only way to go!