November 11, 2011

The Bill Comes Due

“The problem with socialism is that you eventually run out of other people’s money.”
–Margaret Thatcher

European Unraveling 

Europe seems to be on the verge of fiscally unraveling.  Greece is most likely a hopeless case.  Italy is apparently sinking deeper into the financial quicksand as it struggles to find lenders while the yield on its 10-year bond crossed 7%, a level some consider unsustainable.[1]  It’s to the point the European Central Bank (ECB) has found it necessary to buy large amounts of Italian bonds.[2]  The financial troubles of Spain, Portugal, and Ireland are already well known.  And now the focus is northward to France, as the nation’s bond risk has risen to the point where the cost of insuring French government debt is at an all time high.[3]  All the more disconcerting since the G-20 have refused to infuse the International Monetary Fund (IMF) with more cash to assist in European bailouts.[4]

And now we have German Chancellor Angela Merkel who recently stated:

“It is time for a breakthrough to a new Europe…A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can’t survive…That will mean more Europe, not less Europe…”[5]

As I see it, Merkel’s comments, along with the stark reality of the European fiscal scenario means goodbye to national sovereignty.  Never mind treaties limiting borrowing and money printing, or requiring country-by-country approval of decisions by centralized European authority.  Never mind the integrity of currencies.  To me, it all also means something I’ve always believed was coming – money printing to levels which could baffle the mind.

The Bill For European Socialism Comes Due

I can’t help but agree with Thatcher’s quote above.  Governments can’t spend money they don’t have in perpetuity.  Sure, politicians can get elected making fiscal promises to voters even if they’re unaffordable.  At least for a while.  Ultimately however, the money runs out.  And the bill comes due.  Historically, when governments become overly indebted and can no longer pay for what they’ve bought, they print money – watering down the value of the currency they pay their debts back in.

In my opinion, the problem traditionally fiscally irresponsible countries like Greece, Italy, Spain, and Portugal have today – is precisely that they are part of the Euro while they’ve maintained their fiscally profligate ways.  In other words, quite committed to socialism, they never got their fiscal houses in order — but being part of the Euro they can no longer just print to debase their old currencies to make their debt repayment easier.  The final 1998 conversion rates to the Euro were 1,936.27 Italian Lire; 340.75 Greek Drachma; 166.386 Spanish Peseta; 200.482 Portuguese Escudo; and 6.55957 French Francs.[6]  Just looking at the conversion rates, how could one not envision today’s fiasco taking place?

Seriously.  But such seems to be the either blind or willfully obtuse vision of socialists.

What next?  I see politicians blinking.  Rapidly.  I believe massive amounts of Euro money printing will begin pronto.  Also in the U.S. as I see QE 3 imminent.  And based on this, I see global competitive monetary debasement accelerating.  It’s my opinion, investors should be prepared.

As always, 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.

Sincerely,

Stephan R. Ernharth, JD
Vice President
Ernharth Group
www.ernharth.com

Go to www.ernharth.com/economic-commentaries to read past articles from our Economic Commentary series.