According to The Telegraph, Germany and France have now agreed the principles of a €2 trillion to €3 trillion EU rescue plan.
According to the article,
Details will be thrashed out this week but there now appears to be consensus around the core measures – to increase the firepower of the eurozone bail-out fund (EFSF) from €440bn to around €2 trillion, to recapitalise the banks with €100bn-€200bn, and to devise a credible programme for Greece, including losses for private sector creditors of as much as 50pc.
In addition, the usual pledges (yes, the same kinds of pledges we've seen coming out of the likes of Greece for 2 years) for greater austerity and productivity may be part of the package.
The plan requires financial support from EU members, but other G20 and IMF members may also be coerced to assist.
Let's imagine that, despite a history of squabbling, the world creates an agreed-upon plan to bail out Europe by next weekend. Let's also ignore the conflicting interests of European politicians and their angry constituents, who are already rebelling against the 1%. Let's also imagine that bondholders agree to the proposed 50% haircut. And finally, let's imagine that non EU Treasury departments (e.g. US Treasury) willfully participate. What does a European bailout mean for investors?
In the short-term, risk assets (e.g. S&P 500 (SPY), high yield bonds (HYG, PHB, JNK)) will probably experience a strong relief rally. That's the obvious first-round effect. But when one digs deeper, one is forced to question where these trillions of euros are coming from.
In reality, there are only two options: more debt and money printing.
This bailout scheme, if it were to occur, is to the EU what the Federal Reserve was to Long Term Capital Management and the Savings & Loans institutions. The Federal Reserve and US Treasury have long been accused of kicking the can down the road by creating a bailout nation, raising moral hazard to such proportions as to bring down the entire global financial system. We saw the effects of kicking the can down the road for too long when the global financial system disintegrated in 2008/2009. Clearly, the world has not learned a thing.
Piling on more sovereign debt to cure a sovereign debt crisis is so asinine that a 10 year old can spot the irony. I won't waste any of your time explaining why this is so - after all, when was the last time you borrowed money to pay your mortgage? What I will say is that the debt 'cure' simply sets up the world for an even bigger crisis sometime down the road.
It is very likely that any additional debt issued by Treasury departments around the world will be monetized (probably covertly) by central banks. I have said this many times: the least painful way out of the current global crisis is to inflate. While this is not to say inflation is painless, it is probably less of an economic shock than outright default or extreme austerity. Inflation, however, is a tax on the middle class citizens of the world who are indirectly paying for Europe's bailout, which indirectly is a bailout of European banks.
Are citizens of the world still unaware of the reasons and repercussions of bailing out the economies and banks of the world? Anyone following the 'Occupy' movement knows that Joe Average is painfully aware that his productivity, his wealth, his tax dollars are being used against his will for the good of the elite class. More debt, more money is one thing, but if citizens are forced to cut back even further to pay for a European bailout expect more civil unrest.
While the policy of 'extend and pretend' should benefit risk assets for some time (just as it did throughout 2009 and 2010), what will more debt, more money printing and more civil unrest mean to an investor?
It will mean that trust in money will further erode and the case for monetary metals, such as gold (GLD) and silver (SLV) become even stronger.
Disclosure: Long gold and silver. This is not advice. While we make every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.
