The bulls have to laugh
“A crisis!” Is there a crisis? Last week the bulls had a good laugh at all those who think that a second economic crisis is breaking out. A successful loan to Spain proves that the Bulls are right. There is enough confidence in financial institutions, and Europe has solved the problems well. So we can stop worrying and go on with our lives.
A few pieces of macro-economic data from the U.S. last week: more applications for benefits, lower production, a huge oil spill and a growing tension between the U.S. and the China Yuan. Why so good?
Two months ago, the markets got nervous. The stress which arose around the Greek crisis and the potentially severe shortage of Portugal, Spain and Ireland, brought the markets down at full speed. That tension is going away. The Europeans have an emergency fund and many European countries have strict measures to combat shortages. Financial markets are so relieved that they can weather this.
Who knew? Who would have thought that the debt crisis would be resolved so quickly? Not me! I think this crisis has yet to begin! The debt of almost all Western countries has grown so large that repayment is impossible. I hear you say, that’s been so long? Most Western countries have had a large deficit problem over 40 years. It is not a new phenomenon. Many economists and analysts even claim that it is no problem. Governments should assist and it would be unhealthy to create a surplus since Governments need to invest. They are the engine of the economy and they have to keep running. That’s nice talk as long as the economy grows every year, but how is it when the economy declines?
Almost all Western countries have deficits averaged between 6 and 12% allowed in their budgets. Will you consider what such a debt costs? And what happens to government revenue from a falling economic income? How can you bring back such a debt? By cutting back even more. Of course not, that is unthinkable to the people. By borrowing? Exactly, there is only one solution and that is to finance debts with new debt.
And that is exactly what is going on right now. Despite the budgets cuts, the debts are still dramatic. Almost all western countries are going to enormous amounts of financial markets pick up? Bonds with a maturity of 5 years are at an average rate of around 5%. The bill is postponed but not solved. Inflation stands at 1%, interest on loans is on an average at 5%. Debt stands at a number of countries against 12%. With these figures, the savings are a drop in the ocean and the balance is not restored at all.
I often hear people say that trading is an investment for the future. We look not at the present situation but to the future situation. The past year there has been economic growth and stock markets are historically low. So what can be done? The future looks good and we may expect the first wave of government austerity hard to come. Authorities are responsible for running 1/3 of the economy in general. A second round of cutbacks will probably be necessary if the current figures show that there is insufficient account of revenue shortfalls and significantly increased loans.
The balance may thus be lost and the question is how will governments respond to these? The political reality is that the first wave of cuts will be implemented very easily. In France, Spain and Greece, people were on the streets, but people also understand that due to government intervention. We see everywhere the retirement ages going up and wages are frozen.
It is not the small countries with such problems. The UK, U.S. and large parts of Europe began the downward period of cutting public spending and repairing the balance. At the same time they are getting billions out of the financial markets at unfavorable rates. This will disturb the balance again hard. This process can take years and is influenced by many factors not in the control of the powers. Look at Japan in his case. They have been in this situation for almost a decade. Consider the possibility of deflation, which will be a disaster for the debts.
Think of the departure of industry from the Western countries. For many groups in society there is no industrial work anymore. Think of the savings behavior of citizens (they closed their wallets). All have huge important issues that influence the balance of governments. We have learned over the last thirty years to think of only prosperity. It was always a temporary down movement in economy. Perhaps the negative cycle of increasing debt and a downturn in the economy is still far from complete and we are only just beginning. Face the facts Bulls! How hard are you laughing?
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