Well, another day and another threat to a Euro Zone problem. To everyone out there that actually thinks that the recent elections are the answer to the Euro Zones problems I salute you. Not to say that you are on the right track and to a mission well done, but more so to a farewell good-bye off the cliff of oblivion. Yes, the Euro Zone elections are in and it seems the general population has voted on the side of giving themselves massive spending increasing from the government. They all want the government to spend more money to stimulate the economy. I love that general term…stimulate the economy. In further posts I can explain what that means in real terms, but right now I can explain what that means in real time. Governments around the world are going to need money to do this thing called “stimulate the economy”. So, they are going to hold what is called bond elections…usually heard about on Fox Business or Money MSN. You usually hear about bond sales from governments all the time, but do not realize how related they are to how well an economy does and to what end it dictates to what an economy can do. Let me spell it out for you on the Euro Zone.
Yes these socialists did win. Yes they promised more spending and more debt. Yes they will get more spending and more debt. Yes they will increase their countries’ debt to levels never heard of before in history. Yes they will create such a bubble of government spending we will never have known in history. Yes there will be a major fallout from this. Yes they did follow the American “Obama” concept of spending. Yes the world is on a course of debt..Or deficit…spending that will lead to a backlash that we have never seen before. However, what we will see is a short term of prosperity that will seem like the markets are doing well. We will see people investing and making good returns. It will seem like the markets have corrected themselves and that we are out of the woods as far as the housing bubble that killed us in 2007/2008. However, what has actually happened is that we replaced debt with an insurmountable pile of debt. If you have money, invest it now. Yes you will make some great returns. However, pull out within the next six months or less. This is how it works, great amounts of spending from the government makes it look like the economy is getting better, but it doesn’t create sustained growth. It only means that the numbers look good as long as the government spends, so analysts misinterpret how the macroeconomics are playing out, and so people with money fail to invest in the actual growth industries. What will happen is government money will dry up…REAL quick. I’ll explain why shortly.
Once government money dries up then there will be a major drop in GDP for all countries across the globe, which means a major recession will happen overnight. Government spending ends overnight for a couple of simple reasons. With the Euro Zone, it will end soon (this could happen in a week, 6 months, even a couple years but it will happen), because these countries will go to borrow money for their bonds (which is the process for any country to borrow money to spend beyond its means), and investors will require a certain amount of money in return (which is represented by an interest rate). The more money they borrow the higher the interest rate. Most of the Euro Zone’s borrowing limits are not just maxed out, they are in crisis mode.
So let’s say today that I have $100 to invest. I can invest in stocks or bonds. Well let’s just take for example that I lost all my life savings of $10,000 in the US stock market in 2007 and I am a little burnt out on that solution. So I look to bonds. So I want to make sure I make some kind of return in this volatile market we are in right now. I look at bonds across the board and the steadiest bond right now is the US bond. However, it is less than 1%. But I look at the Euro Zone bonds and it is up around like 6-10%. Why is that? Well, the interest is what we like to call the likelyhood of you getting paid back. It is high because it is that much more risky in which you will never see your money again. The more a country borrows, the higher the riskiness, and as we see more Euro debt accumulate it will be costly for them to borrow. Do not just take my word for it, Bill Fleckenstein also feels this way, who is a contributor for Money MSN. So I say let these crazy people get elected with these crazy ideas about spending. Once they go to borrow money that no one is willing to loan them, they will see a massive default on their sovereign debt, and there will be a massive sell off of Euro Zone debt and a flight to the American Dollar we have never seen before.