September 28, 2011 


“Nobody believes that the states will eternally drag the burden of these interest payments. It is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract.”
—Ludwig von Mises

Getting Beyond Serious

My clients know I’ve long cautioned about an impending day of reckoning for an overly leveraged developed world.  That said, as that day seemingly arrives, I can say the potential magnitude is astonishing nonetheless.  As the sovereign debt crisis in Europe continues to unfold, it seems time is beginning to run out on the G-20 member nations in their attempts to avoid nothing less than a global financial meltdown.

Is that an overstatement?  I don’t think so at all.  World Bank President Robert Zoellick doesn’t seem to think so either as he bluntly stated on September 23, “The world is in a danger zone.”[1]  He also stated, “Europe, Japan, the US must act to address their deep economic problems before they become a bigger problem for the rest of the world. Not to do so would be irresponsible.” [2]

I don’t think US Treasury Secretary Tim Geithner disagrees with me either.  He sounded more than concerned when he recently warned, “The threat of cascading default, bank runs, and catastrophic risk must be taken off the table.”[3]  Yes, you read that correctly,“The threat of cascading default, bank runs, and catastrophic risk…”[4]  Geithner also cautioned, “Sovereign and banking stresses in Europe are the most serious risk now confronting the world economy. Decisions cannot wait until the crisis gets more severe.”[5]

An Underfunded IMF

On September 24, New International Monetary Fund (IMF) Director Christine Lagarde said, “The fund’s credibility, and hence effectiveness, rests on its perceived capacity to cope with worst-case scenarios”[6] and that the IMF’s $384 billion “looks comfortable today but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders.[7]  The IMF’s reserves were tripled in 2009 by the G-20[8] and I’d not be surprised if another similarly exponential increase takes place very soon.

Brazil, Russia, India, China and South Africa are taking the situation in Europe so seriously they recently stated they are “open to consider, if necessary, providing support through the IMF or other international financial institutions in order to address the present challenges to financial stability.”[9]

And the Plan in Europe?

In Europe it’s getting downright interesting – and dicey.  The European Financial Stability Facility (EFSF), was originally funded with 440 billion euros.[10]  The latest proposed plan involves a staggeringly larger amount of money — including 2 trillion euros to be raised for the EFSF, a 50% default on Greece’s 350 billion euro debt, and a bail-out for the banks (mostly French and German) holding Greek debt.[11]  This new, colossal bailout plan must be approved by Eurozone members’ national Governments — and  Slovakia, Netherlands, Germany, and Finland have indicated their reluctance to provide the EFSF greater powers.[12]

Speaking of Germany, it’s already on the hook for over 25% of the current bailout fund.[13]  If Germany is asked to pony up 25% of the additionally proposed 2 trillion (500 billion euros) – things could get really interesting in the Bundestag.  We think the passing of such a measure is far from a done deal.

What’s at Stake

In my opinion, the battle in Europe is twofold.  First, nothing less than national sovereignty is at stake.  Will independent nations still get to decide how their money is spent?  Or will a superseding international financial/governmental body get to call the shots for them?  Secondly, when will European citizens and their political representatives say “enough” and vote against further bailouts?

I do believe the latest round of $trillions in bailouts will take place one way or the other.  I’d not be surprised to see $trillions and $trillions more.  And where will the money come from?  In my opinion, where it always does in these scenarios.  It will be printed out of thin air, diluting the hard-earned savings of investors.

And I firmly believe investors must plan not to be victims.  In the process planning to not just survive — but to thrive.

Despite the current environment, I maintain my positive outlook. That outlook is based on my belief a bear market in one thing is often a bull market in another.

As we enter this critical time – now, more than ever – I believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economic circumstances. Others may feel free to contact us to learn more.


Stephan R. Ernharth, JD
Vice President
Ernharth Group

Go to to read past articles from our Economic Commentary series.

[1] Bloomberg, “G-20 Vows to Tackle ‘Renewed’ Global Risks” September 23, 2011
[2], “Plan B: Flood the markets”  September 24, 2011
[3], “Geithner Plan for Europe is Last Chance To Avoid
Global Catastrophe”  September 25, 2011
[4] Ibid
[5] Ibid

[6] Bloomberg, “IMF Resources May Not Suffice If Crisis Worsens” September 24, 2011
[7] Ibid
[8] Bloomberg, “IMF Resources May Not Suffice If Crisis Worsens” September 24, 2011
[9] Bloomberg, “G-20 Vows to Tackle ‘Renewed’ Global Risks” September 23, 2011
[10], “The 2 Trillion Fund to Save The Euro” September 25, 2011
[11] Ibid
[12] Ibid

[13] Ibid